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  • 5 Ways PSU banks can fund their capital needs

    India’s banks have a big problem, especially those run by the government. Loans worth crores of rupees have not been repaid. This puts a lot of pressure on the banks. After all, it is only when people repay loans that banks earn any profits. And without profits, it is difficult to sustain a business.

    In India, whenever businesses are in trouble, they run to the government for support. In this case, the PSU banks have asked the government give money. This is called as ‘capital infusion’ or ‘bank recapitalisation’.

    However, many argue that taxpayers’ money should not be utilized to fund ailing banks. The RBI deputy governor Viral Acharya too believes the same. “We must not allocate capital so poorly, recreate “Heads I Win, Tails the Taxpayer Loses” incentives, and sow the seeds of another lending excess,” he said in a speech recently. He then offered four alternative ways of funding the bank’s capital needs. Here’s a look:

  • Look for private capital: “The healthier public sector banks could have raised private capital by issuing deep discount rights in 2013, and some can still do so now,” the RBI deputy governor said. This could help share the government’s burden, he added. This option also offers another benefit—private investors tend to improve the quality of a business. This could keep banks in check and avoid future problems.

  • Sell assets to raise money:  Look at Bollywood movies. When in trouble, the mother sells jewellery to raise money. Banks can take a similar action. They can sell assets like good ‘loan portfolios’. Yes, loans can be sold. The interest payments have earning potential. So a lot of parties can be interested in buying loan portfolios. The RBI deputy governor also suggested selling other assets like insurance subsidiaries, market-making divisions, and foreign branches. For example, the State Bank of India (SBI) plans to sell 10% stake in its life insurance business. This could earn the bank Rs 4,600 crore, as per news reports. The money raised from such sales can be used to recapitalize the banking business.

  • Sell government stake:  It’s not just the banks that can sell assets to raise money. Even the government can. And in this case, the asset is the government’s ‘ownership’ in banks. For example, SBI has a market capitalization of Rs 2,34,658.72 crore. So, even a 5% stake sale could fetch the government Rs 11,733 crore. Compare this with the government’s recapitalization budget of Rs 10,000 crore for the year 2017-18. The RBI deputy governor also suggested that public-sector banks can be privatized. This can help the government raise crores of money and help it narrow its fiscal deficit.

  • Two can become one:  “The system will be better off if they (banks) are consolidated into fewer but healthier banks,” Viral Acharya said. This can also throw up opportunities to rejig the managements of these banks. Mergers can help evaluate performances of those in the management. So those who have underperformed could be taken off the key positions. This can help improve the quality of business and banking services offered. Also, mergers can help cut costs and change the workforce. “Voluntary retirement schemes (VRS) can be offered to manage headcount and usher in a younger, digitally-savvy talent pool into these banks,” the RBI deputy governor said.

  • Tough prompt corrective action: YThis is not a funding option, but is essential nonetheless. “Undercapitalized banks could be shown some tough love and be subjected to corrective action, such as the revised Prompt Corrective Action (PCA) guidelines recently released by the Reserve Bank of India,” Viral Acharya said. The PCA classifies banks into three risk categories. Depending on the category, the RBI prescribed restrictions. This includes, not paying any dividends, not being allowed to expand branches, cutting down management salaries, etc. The RBI deputy governor suggested that such actions should also include restrictions on growth in deposit base and lending. Thus, the weakest banks could exit the system and cut down risk.

    • You can read the Deputy Governor’s speech here: Read more

    • Time to revisit the idea of public sector banks Read more

  • 30.62%

    There may be worries about the banking sector, but the stock market sure does not reflect it. The S&P BSE Bankex, which measures the performance of bank stocks, rose 30.62% in 2017 as of May 3rd, 2017. This is more than double the 14.46% rise in the benchmark Sensex index.